Premier Foods - the split-up options

Following Premier Foods appointment of a new COO with a brief to help see the grocery and bread businesses managed as two distinct divisions in recognition of the different “opportunities and challenges” facing each business, it might be useful for NAMs to explore the options and possible actions available to the company. This could add insight on how the company will manage the trade and also help you anticipate the impact on competing brands.

Essentially, the company needs to increase its perceived value in the market and thus raise its share price. This will not only give it more autonomy but will also make it easier to sell all or part of the operation at the appropriate time..

The emphasis will therefore be on improving its Return On Capital Employed (ROCE), a driver of the share price.

Step 1
The first step has to be a split of bread and groceries, given that they are totally different business models.

• Bread is a fast moving, high rotation (daily), high wastage (10+%), short shelf life (days/weeks) and narrow margin business, especially supply-side, whereas
• Grocery is slower moving, low rotation (2 monthly), lower wastage (2+%), long shelf life (1-2 years), more generous margins supplier and retailer

Bread: Premier need to strip out cost, sell-off non-core parts, simplify and explore possibilities of sharing the distribution burden

Grocery: Here they need to continue emphasis on a limited number of power-brands and sell off anything non-core

Step 2
The company will then be in a position to apply the ROCE principles to what remains on the two businesses.
ROCE = Return on Sales  x Sales/Capital Employed  i.e. improve the margin and speed up the rotation of capital (factories + stocks, debtors and cash)

Companies are either in a narrow margin, fast rotation business, or they are in a higher margin, slower rotation business. This is why splitting the bread and grocery businesses is a long overdue no-brainer….

Step 3
First they need to focus on improving Net Margin by

• Increasing their selling prices and sales (more advertising on fewer power-brands, up-skilling the negotiators)
• Reducing the levels of discount and promotional expenditure ( did I suggest it was going to be easy?)
• Reducing the levels of sales and distribution costs (hence hiving off the bread business, and need for special vigilance on trade funding and compliance)
• Driving volume, especially bread but also grocery power-brands ( move to more responsive social media )
• Changing the product mix to focus more on higher margin items, (consumers permitting…)
• Minimise ‘specials’ in terms of tailor-made deals/trade arrangements of any kind, (they just cost more…)

Step 4
Then comes increasing the Rotation of their Capital by

• Driving the volume of sales as high as possible, using existing or lower levels of Fixed Assets (factories, plant), + Current Assets (stocks, debtors and cash)
• Getting paid faster via settlement discounts, ‘delisting’ any financially unstable customers
• Improving sales forecasts i.e. if they forecast 100% and achieve 95%, then 5% of sales become ‘passengers’ with their costs shifting onto the 95% that are sold, thereby hitting the bottom line
• Generally, improving their ability to convert business cost into revenue…

These moves will drive the overall ROCE, increase the share price, and make each or both of the companies easier to sell, if necessary.

If all of this seems a bit theoretical, why not watch this space over the next six months? You will then be looking at historical moves, whereas some of the above points may help you anticipate and take appropriate action NOW, when it really matters…